MPs: Don't rule out breaking up banks that are too big to fail

Ministers should reconsider breaking up banks that are too big to fail, the Treasury Committee urged yesterday.

The committee criticised Alistair Darling's decision to rule out a move towards 'narrow banking', in which large institutions are divided up to reduce their threat to economic stability.

Similar proposals are being considered by US President Barack Obama.

In the line of fire: Darling annouces the Budget last week. He abandoned plans to carve up big banks this year

But the Chancellor abandoned the idea of carving up big banks this year, saying the move would be ineffective because small institutions can also pose risks to the economy.

In a wide-ranging paper on the fallout from the banking crisis, the committee calls for Darling to look again at the idea, pointing to Obama's plans as proof that the Chancellor's view is 'not universally accepted'.

The report states: 'The debate on banking reform should remain as wide as possible. Structural reforms should not be ruled out.'

The committee's position puts it more in line with the Tories and Bank of England governor Mervyn King.

In a nod towards the proposed entry of new players to the banking arena, such as Tesco and Richard Branson's Virgin Money, the report calls on the next Treasury Committee to look at mechanisms to increase competition in the sector.

It explicitly ties the issue of bank size to competition, adding: 'Effective competition will be inhibited for as long as incumbent companies are too big - or too important - to fail.'

Measures to force banks to make 'living wills' detailing how they could be wound up in the event of failure also won the backing of the influential group of MPs.

'We look forward to the FSA's eventual announcement that all UK banks have in place an effective living will,' the committee said.

The report contradicts Darling's repeated insistence that reform of the banking sector cannot be completed without international agreement, adding: 'Britain has a very large banking sector and its reform is anyway in our own self-interest, even if it is not coordinated with reforms in other countries.'

The MPs also said the government should give 'serious consideration' to the notion that British branches of foreign banks be considered subsidiaries rather than divisions of the parent company.

This would give the Financial Services Authority the power to regulate foreign institutions on British soil.

Meanwhile, employment in the financial services sector has tumbled to its lowest level since records began in 1996, the Confederation of British Industry says.

It claims the number of people working in banking, insurance and stockbroking has fallen 116,000 since the run on Northern Rock in 2007, hitting an estimated 955,000 this quarter.